UniFirst Corporation — FY2014 First Quarter 10-Q
Reporting period: Thirteen weeks ended November 30, 2013; comparisons are with the thirteen weeks ended November 24, 2012. UniFirst provides workplace uniforms and protective clothing, rental and cleaning services, specialty garment services, and first-aid products and services.
Financial results
| Metric | Q1 FY2014 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $346.7 million | $332.6 million | +4.3% |
| Operating income | $55.6 million | $50.0 million | +11.4% |
| Operating margin | 16.0% | 15.0% | +1.0 percentage point |
| Net income | $34.5 million | $30.8 million | +12.0% |
| Diluted EPS, Common Stock | $1.71 | $1.54 | +11.0% |
| Cash from operations | $68.6 million | $56.2 million | +$12.5 million |
| Capital expenditures | $22.8 million | $25.1 million | -$2.3 million |
Cost of revenues declined to 60.0% of revenue from 60.6%; selling and administrative expense declined to 18.9% from 19.3%. Management attributed operating leverage chiefly to Core Laundry Operations revenue growth, lower merchandise and energy costs as a share of revenue, lower bad-debt expense, and lower payroll-related costs as a share of revenue. The effective tax rate was 38.9%, versus 39.0%.
Business and segment performance
- Core Laundry Operations: Revenue rose 5.9% to $312.0 million; organic growth was 5.1%, excluding acquisitions and the weaker Canadian dollar. Management cited stronger new-account sales, annual price adjustments, and customer additions exceeding reductions. Operating income increased 17.6% to $52.4 million.
- Specialty Garments: Revenue fell 12.3% to $24.4 million, primarily because of lower U.S. and Canadian reactor business; operating income declined 41.3% to $2.8 million. Results can vary with reactor outage timing and project activity.
- First Aid: Revenue was essentially flat at $10.3 million; operating income declined 30.0% to $0.5 million.
Cash, liquidity and debt
- Cash and cash equivalents were $141.8 million at November 30, 2013, down from $197.5 million at August 31, 2013. Working capital was $328.0 million.
- Operating cash flow was $68.6 million. Investing activities used $23.0 million, including $22.8 million of capital expenditures; $6.4 million of capex related to the ongoing customer relationship management system update.
- Financing activities used $100.9 million, principally reflecting repayment at maturity of $100.0 million in Floating Rate Notes from cash reserves. The notes matured September 14, 2013.
- The company reported no revolver borrowings, $49.7 million of letters of credit, and $200.3 million available under its $250.0 million revolving credit agreement, which matures in May 2016. It was in compliance with covenants. The balance sheet reports $10.5 million of loans payable and current debt maturities and $0.2 million of long-term debt at quarter-end.
- Management said cash, expected operating cash generation, and available credit should be sufficient for anticipated working-capital and capital-expenditure needs for at least the next 12 months. It also disclosed $61.9 million of cash held outside the U.S., expected to remain invested indefinitely in foreign subsidiaries.
Outlook, risks and unusual items
- No specific revenue, earnings, or margin guidance was provided. Management cautioned that interim results are not indicative of full-year performance and noted historical seasonality, including lower results generally in fiscal Q2 and Q4.
- Risks highlighted include economic conditions and customer employment levels; fuel, energy and labor costs; competition and margins; foreign-exchange movements; labor relations; raw-material supply; acquisitions; and information-technology interruptions and CRM system implementation.
- Environmental remediation liabilities were $19.4 million at quarter-end. The company described multiple sites, ongoing remediation and monitoring, and EPA Clean Air Act notices alleging permit failures at seven New England facilities; it was obtaining permits and negotiating potential penalties. Expansion of the EPA initiative could materially adversely affect results and financial condition.
- NECC litigation: A master complaint filed in November 2013 named UniFirst among numerous defendants. As of December 31, 2013, the company had received demand letters from or been named in suits by more than 200 parties. Insurers had issued reservation-of-rights letters. Management said a loss was neither probable nor remote but could not reasonably estimate a loss or range; uninsured liability could be material. The filing was signed January 9, 2014, so this count is a subsequent-date disclosure.
- The company stated that no material changes in contractual obligations occurred apart from repayment of the $100.0 million notes, and that it had no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether Core Laundry’s organic growth and margin improvement persist, particularly as Specialty Garments remains affected by reactor outage timing and project work.
- Potential outcomes, insurance coverage, and financial exposure from the NECC claims, including the inability to estimate potential losses.
- Environmental remediation costs, EPA permitting matters and potential penalties, and whether regulatory actions expand beyond the cited facilities.
- Cash deployment and liquidity after the $100.0 million note repayment, including capital spending on the CRM project and the availability of revolving credit.
- Exposure to foreign exchange, energy, labor, economic, and seasonal fluctuations identified by management.